This week’s TGIF considers the decision of Crowe-Maxwell v Frost [2016] NSWCA 46 in which the Court held that a liquidator did not discharge his onus of proving relevant transactions were unreasonable director-related transactions.

BACKGROUND

A husband and wife operated a childcare business through a corporate entity of which they were the sole directors and shareholders (Company). The husband worked full time in the business, while his wife worked casually in addition to other full time work. The business was conducted from their residence.

When the business began to suffer financially, the directors used personal savings and borrowings from family members to continue operations. The books and records of the Company were not properly kept and the directors failed to keep their personal finances separate from the Company’s finances. An order was eventually made that the Company be wound up.

FIRST PROCEEDING

The liquidator sought recovery of certain payments made by the Company which he alleged constituted unreasonable director-related transactions within the meaning of section 588FDA of the Corporations Act.

The Court held that the relevant payments did not constitute unreasonable director-related transactions.

APPEAL

The liquidator appealed, arguing that:

  • The trial judge incorrectly took into account, as evidence, the defence filed by the directors - pleadings could not be admissible as evidence.

  • The trial judge incorrectly relied upon statements made by one of the directors from the bar table as evidence of the matters stated.

  • it was sufficient to discharge his onus of proving that the relevant transactions were unreasonable director-related transactions by pointing to the fact that payments for personal expenditure had been made and there was an absence of Company resolutions or accounting records relating to those payments.

  • Having discharged that onus, the directors then bore the onus of proving that those payments provided some benefit to the Company.

DECISION

In dismissing the appeal, Beazley P held that:

  • The trial judge did not err in ruling that parts of the defence were admissible, as the statements were evidence of the director’s belief in the matters asserted. In a given case, statements made in verified pleadings may constitute admissible evidence. It is not the case that verified pleadings can never be evidence or can only be evidence of opinion.

  • The trial judge did not err in relying upon the statements made from the bar table, as such statements were proffered as an explanation as to why the directors’ own funds and those of the Company were mixed. It is not impermissible to take into account explanatory statements and characterisations of the evidence proffered from the bar table.

  • The onus of establishing that a transaction constituted an unreasonable director-related transaction is on the party making the allegation. Where there is limited evidence of the nature or purpose of a transaction, the Court may infer that it is unreasonable where the surrounding circumstances show it to be a departure from the normal commercial practice of the Company. In this way, a defendant may be said to bear an evidentiary onus of raising some commercial explanation for the transaction .

  • In this case, the liquidator did not discharge his onus of proof. There was not a lack of evidence of the nature or purpose of the transactions such that the Court could infer that the transactions were unreasonable.

  • Impropriety or breach of director’s duty is not necessary to establish an unreasonable director related transaction.

  • The inquiry as to whether a transaction is unreasonable is concerned with the reasonableness of the company’s conduct by reference to all relevant circumstances.

  • Normal commercial practice and prior contractual relationships are relevant but not determinative factors in that inquiry.

  • A transaction of derivative benefit can still be for the benefit of the company.

This decision helpfully restates the relevant principles in determining whether a transaction constitutes an unreasonable director-related transaction. It also demonstrates that liquidators must be careful to ensure they discharge their onus of proof and not simply rely on the Court inferring a lack of benefit to the Company.